Calls grow for greater drawdown guidance as 74% face running out of retirement funds early

Older savers could risk running out of defined contribution (DC) pension savings with a third of their retirement still ahead of them, with many facing spending their final years reliant on the state pension, according to industry research.

The New Choices, Big Decisions report, published by The People’s Pension and State Street Global Advisors, revealed that 74 per cent of savers are spending their pension savings at a pace that means they will run out of money in their early to mid 80s, despite many being expected to live into their 90s.

They found that people “overwhelmingly” viewed the idea of a guided drawdown product as very useful, and were keen for their provider to give them a "safe guided path" to retirement.

In particular, it was noted that members especially valued the flexibility to change their mind at any stage, with 'experts' making the difficult choices for them.

The report also emphasised that the typical saver follows the path of the least resistance, stating that they would not leave a product or change a drawdown withdrawal rate once they have signed up.

Despite this, it warned that deep-seated behavioural biases will make it very hard to engage members with their retirement planning and that present bias is driving contentment in life in the early years, despite risking disappointment in later years.

Furthermore, it found that the Covid-19 crisis has reinforced the decision to take and spend tax-free cash amongst members, with many feeling vindicated that they had made the choice to enjoy the money when they could, such as for travel.

Considering this, it emphasised that pension freedoms have reframed pension savings more broadly, with members now fundamentally viewing their DC pots as “just another form of savings”, which has in turn had “significant behavioural consequences”.

Indeed, it also highlighted the findings as evidence of a “massive discrepancy” between expert assumptions and actual behaviour, with many savers scared of planning for the future as they are reluctant to discover the “truth” about their savings.

The report stressed that drawdown is not subject to the same value for money quality requirements, defaults or price cap policies as DC pension savings, warning that the drawdown market could potentially be the next pension scandal "waiting to happen".

It stated: "As new and cheaper drawdown products are developed, perhaps even embedding responsible investment as a default, the industry would do well to remember that it generally operates in an environment where member inertia prevails.

"But with nearly a million policies already in place, the last thing our industry needs is another legacy product scandal to tarnish members’ already fragile trust.

"A nudge is seldom enough. Existing members will need to default into new products, unless there is a good reason not to."

In light of this, the report recommended that future regulation around minimum standards for drawdown products take into account outcomes for legacy customers.

Commenting on the findings, B&CE director of policy and external affairs, Phil Brown, stated: “This research shows why policy makers must require pension schemes to guide members to products which match retirement risks, including living longer than they had planned for, and which will ensure that DC pension savers have an income throughout their retirement.

“There is evidence that a significant number of people are sleepwalking into retirement and will have a worse quality of life in later years than could have been the case if they had been guided.

“People would be dismayed to arrive at a car dealer’s forecourt to buy a car, be presented with a selection of parts and told to a pick a selection and build their own vehicle, so why do we expect pension customers to do exactly this?

“This report fills a big gap in our understanding of how pension freedoms are working in practice.”

State Street Global Advisors head of EMEA pensions and retirement strategy, Alistair Byrne, added: “This research shows clearly the very many challenges that older savers face when making a decision about their pensions.

“People struggle to see beyond the near-term future and cannot always access the type of advice and support they would like.

“As an industry we need to continue simplifying what we offer, providing guidance and support, and easy paths to follow, whether we call them ‘defaults’ or not.”

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